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Does building roads harm the economy?

By Matt L, on January 25th, 2014

Most proposals to build new roads or widen existing ones seem to boil down to an ultimate belief that it will “help the economy”. Whether it’s by improving freight reliability or getting people to their jobs faster or helping business travel or whatever, there seems to be a fundamental belief among many that quite a strong relationship must exist between building more roads and improving the economy.

Clearly this is a contestable assumption, and some recent research in the USA details some pretty interesting trends – as reported on in Planetizen:

I recently decided to follow up on this line of research, so I dug through some Census data. What I found was shocking, though not altogether surprising. It seems that, besides wasting billions of taxpayer dollars, road-building may actually be holding back economic growth overall: from roughly 2000 to 2010, states that built the fewest urban road miles grew an average of 64 to 94 percent faster than their asphalt-enamored neighbors. Rather than increasing productivity through increased mobility and reduced congestion, as politicians and lobbyists so often promise, all this mindless road-building could be depressing statewide economic growth!

Let’s look at the details a bit more:

Looking at the numbers in aggregate, we see some interesting trends that seem to hold up just about any way you slice the pie:

States that increased their urban road mileage by less than 30% grew by an average of 14.40%, while those that increased mileage by greater than 30% grew by an average of just 8.77%.

If we set the cutoff at 20% mileage growth, states that built less grew by 17.97%, and states that built more grew by 9.24%.

At a 10% cutoff, states that built less grew by an impressive 20.70%, compared to just 10.66% for those that built more.

Statistically, analyzing the correlation between road-building and economic growth gives us an r-score (correlation coefficient) of -0.34, which implies that about 10% of a given state’s economic growth can be explained by how much urban road-building they did over this time period. Many things influence the overall health of any economy, obviously, so we shouldn’t expect the quantity of roads to wholly predict statewide economic growth by itself, but this does indicate a negative correlation between the two variables: more roads equals less growth. (As always, please remember that correlation does not imply causation.)

And for a graphed comparison:

The post’s author, Shane Phillips, doesn’t think that these results are particularly surprising:

Then there’s the opportunity cost: think of all the good that could have been done with the hundreds of billions of dollars spent on roadways over that period: more responsible transportation spending, education, renewable energy … take your pick.

I think it’s probably unlikely that building roads directly harms the economy, but there are logical reasons to think that it might cause indirect harm: particularly due to it not the best use of public funds and encouraging dispersed land-use patterns which undermine agglomeration. New Zealand’s heavy dependency on private vehicles also forces us to spend a lot of money each year importing cars and oil – basically cancelling out wealth that we create from exporting dairy to the the world.

The next version of the Government Policy Statement will be released some time later this year. If it’s anything like the current version it will stress the importance of transport’s role in improving the economy and then make a giant leap of faith in assuming that building more roads is the best way for transport to improve the economy. It’s time to fundamentally question that assumption.

23 comments to Does building roads harm the economy?

The startling thing about many of the RoNS, especially in the next batch, is not just that they duplicate existing roads but also match existing rail routes. In order for them then to give any sort of positive return on their substantial investment either both these existing freight routes must be at or near capacity or so inefficient and costly to use and the new road so many times faster and better to justify their cost. Given that the first is simply not the case; our freight routes have plenty of capacity then just how much difference can these roads make?

Clearly it is just an assumption that roads always are positive for the economy presumably based on the profound improvement that did occur when we [like the Americans] first extended first rail lines then paved roads through the country. These new routes were profoundly transformational for the economy. The addition of four lane motorway standard roads between parts of the country that already have state highways and rail lines is an improvement but is it a substantial one? Like the in US, which we have long followed, it is surely much more likely the that the net return to the economy is either marginal or negative, as shown in the research above.

This has long been my view about this programme, and it is interesting to see this analysis from the ‘home of the highway’. Here is an earlier description of this problem:

And, worse, there is clearly a huge opportunity cost to this spending. It is obvious that revenue into the National Land Transport Fund is flattening so we cannot so blithely throw this tax resource around on the back of a simple faith that road building always pays.

Both these new roads and the old ones will need to be maintained and policed, and if the old route is relatively unsafe and inefficient it will remain so, and become a burden to all of society and local ratepayers in particular.

I doubt few would question the role improved transport links can have in improving the economic performance of a country.

Refrigerated ships in the second half of the 1800’s being one such example specific to improving the NZ economy, Railways, the Telegraph being others – Telegraph? you say hows that transport related?
Well it changed the focus from a need to move the people (with the information) around, to just moving the information itself – a revolution in thinking as big in its time as the Internet is today.

However, as Patrick and others point out continuously, confusing “better transport” and with “more roads” is not going lead to the wonderful 1950s paradise the politicians and officials seem to believe it will.

Furthermore the opportunity costs of taking this path are not some economists theoretical dis-benefit either – it has a very real cost, to NZ Inc – historically, right now, and for a long time in the future.

And while we can all pretend that climate change and peak car and peak oil don’t exist or will never happen if we want to, reality will eventually intrude into this fantasy – as it always does.

So perhaps we hope the next GPS will be a little forward looking than the last one, or maybe we hope even better, that no matter what the GPS says, the new Government (whatever stripe they are wearing) simply tosses it out like the used tissue it is and starts again with an Integrated transport plan, not one that is presupposes that roads is always the answer to everything..

The Cambridge bypass was to be build to the same standard as the Te rapa Bypass and Taupo Bypass, Being 2 lanes with passing lanes. unless traffic volumes increased.
No change in traffic volumes, but an extra $40 million more is being spent to make this 4 lanes. Because 4 lanes is what we want. nothing to do with safety, efficiency or travel time.

Any accountant, let alone economist, will tell you that the marginal rate of return of continued investment in the same productive asset will not only decline over time, the rate of decline will accelerate over time.
Dear Messer Joyce & Brownlee, to reverse these appalling financial outcomes it would only takes two small tweaks to move from RONs to IONs (infrastructure of national significance) and launch a rethink of the order of investment to include a broader range of projects and actually achieve real ROI gains for NZ Inc. Come on boys, raise your game. (the little ‘n’ in National was the second tweak – a necessary change to raise inclusiveness)

The second point in the above post that I’d love an answer on viz-a-viz the current (2012-2017) works on the North Western Motorway is how much has the cost of the disruption caused during the construction phase been factored into the cost benefit analysis. The disruptions over the past two years have been painful and we have another 3-4 four years of it to go.

You can see iif you look carefully at the CMJ end of the Newton gully photos how the destruction started pretty early in the 60’s for the CMJ [long before any earth works] and continued in one form or another until the early 80’s.

Thats nearly 20 years of continuous disruption and economic upheavel, and for K’Rd and surrounds they’ve never recovered even now – some 50 years on since the CMJ was first conceived and the land clearances were started.

And as was pointed out above in the original post, road widenings seldom last 5 years (at best, often less than that) before you’re back to the same congestion where you were.
You have to wonder, if the road works are even worth it if all it does is induce more traffic.

I am sure that the builders of the Motorway and CMJ thought that their monuments and the harbour bridge it connected to would not be needed to be widened for 100 years.
And here we are already half of that time and they are planning for a parallel motorway to the southern motorway and a second harbour crossing.

I find it quite frustrating that this country has great infrastructure projects crying out for a far-sighted government to step up to the plate. Exhibit #1: A second fibre optic cable system out of NZ. This is the IT equivalent of the WRR – providing the route surety that would then enable the economy to flourish. We just moved our company backups to a Norwegian provider. They market themselves, as a safe reliable place to store data that is powered by green energy. There’s a market made for NZ, but no according to our current government, who think building that kind of infrastructure is for the private sector. I don’t get it.

I absolutely second that comment on the need for a second and faster/bigger international fibre optic cable system out of NZ. Great interview with Rod Drury of Xero Accounting before Christmas on National Radio. They are exactly the sort of high value multi-national company that is well suited to being based in NZ, and he was very much lamenting the lack of broadband security and capacity out of NZ. If ever there was a worthy contender for a RoNS style national infrastructure project, this is it. His comment was that NZ’s environment and life-style opportunities would attract IT companies to base large portions of their operations out here in droves….. if only we could sort out our broadband infrastructure within NZ, and more importantly (his words) out of NZ to international markets. Maybe this is going to be something for the Dotcom Party to focus in on as an electoral platform.

One could argue that with the NZ Government being a member of the UKUSA/ “5 Eyes”/Echelon intelligence network (along with the US’s NSA, GCHQ in the UK etc), that any NZ government involvement in such a scheme would meet with open scepticism that say a Scandanavian government would not, and while the NZ Government may not want to inspect the data you backup/transfer, I’m sure that other 5 Eyes partners will want to as it makes its way to/from NZ.

But yes, we should be investing in these kinds of projects – even if only for the benefit of NZ Inc, as I said above, the invention of the telegraph transformed many economies around the world far more than any RoNS projecever conceived now t could ever hope to do. And here we sit with more and more of them being built.

Why? I think part of the problem is with Joyce et al is that bits running back and forth on a fibre network are just too damn hard to relate to, unlike trucks on roads which are easily counted (and taxed) and which allows them to point at all the traffic and say “See! progress!”

Highways are vitally important to a country’s economic development. The construction of a high-quality road network directly increases a nation’s economic output by reducing journey times and costs, making a region more attractive economically. The actual construction process will have the added effect of stimulating the construction market.

So highways are important because they are economically beneficial. That’s a fact. It says so in the text book. It’s so important and unarguably true that it is the first thing the author wants you to know. Also, engineers’ incomes depend on it.

Seriously, this is one way engineers frame their advice such that it leaves the rest of us in the community (including politicians) without enough freedom to rigorously argue for more sensible priorities. Design proposals nail down what to measure and how much to value it, before bubbling up and out to anyone who hasn’t seen the light of highway engineering.

I wonder how to work around this situation. It may include challenging the technical basis of their analysis, as this blog post adequately does. It may also include structural reform to give other values a fighting chance. I’m curious as to the limits of asset-based community development (or other “grassroots” strategies for exercising democratic control in addition to voting), and whether it might function as a counterweight within projects approaching the scale of a road.

Rule 4.2 states the Code of Ethics to which IPENZ registered engineers must adhere..

1. Protection of life and safeguarding people
2. Sustainable management and care for the environment
3. Commitment to community wellbeing
etc..

There is at face value a case to answer that the statement about “why are highways so important” fails one or more of these tests on several levels. Any IPENZ engineers putting their name to it, indeed failing to challenge it, are therefore arguably in breach of their own rules.

Rule 11.3 states that “Should the Chief Executive receive a compliant from any.. source alleging that a member has acted in breach of Rule 4, the Chief Executive must initiate action to deal with such a complaint..”

So, someone (or ATB collectively, or Gen Zero..) identify an appropriate individual or individuals and make a complaint.

You can find similar obligations in the international engineering institutions. The point is, minimum professional standard are about more just building the road to the prevailing standards. It’s not good enough not to ask the hard questions.

Just a couple of points in response. The book you quote is written by a guy from Dublin so there is not much point complaining to IPENZ about it. Second it says highways are important and a high quality road network helps the economy. Well isn’t that true? Show me a country with no roads at all- what is its economy like? Where are you going to drive buses if you don’t have a road to drive the thing on? Are you suggesting cross country buses? Or maybe we could build a rail network that goes to every house, shop, factory and office? Or maybe load tonnes of milk powder onto bikes in Hamilton and cycle it over the Kaimai ranges. Third the post raises an interesting correlation inspired by an engineer. Yes a dude followed up on a theme from David Levinson who has a Phd in engineering. (John pauses while the blog commentators all raise their crucifixes). Surely it is more interesting to figure out why there is a correlation than tar and feathering engineers who only build projects their political masters ask for. Finally if you read the original blog comments you will see the graph is biased due to outliers where the states have new energy projects and the Katrina rebuild. The blogger notes a correlation close to zero if you omit them.

While I agree with the thrust of your argument, I’m not confident that citing a professional body’s rules will have much effect here. In the remainder of Highway Engineering, Rogers often references the economic benefits of highways, as measured in BCR or dollar terms. Of course, the calculation of these values is strongly biased by the choice of variables, weightings and factors to include or omit, making the whole exercise circular. However, it would not surprise me if this is accepted by societies of engineers as a sufficient appeal to their principles. In other words, I believe they believe they are genuinely doing the right thing.

“The actual construction process will have the added effect of stimulating the construction market.”

This is such a stupid and irrelevant thing to take into consideration when weighing up the economic benefits. Building a series of 30 metre high concrete dick statues would also stimulate (excuse the pun) the construction market.

Stimulant would vary depending on how much of the spend was local, and how much international. Ie tunnelling projects would have lower stimulus because several hundred million spent on an important tunnelling machine, with negligible benefit. Applies both for CRL and Waterview, though the TBM only small part of cost of CRL, with large expense in cut/ cover and station buildings too.
I would also suggest that the economic stimulus has been declining over the decades as less portion out into wages, and more into expensive overseas machinery. Ie depression era projects high stimulus because of huge workforces, but much less money on wages now.

Matt, well done on yet another thoughtful post. I completely agree that save for the success of our dairy industry the country would not be able to afford the cost of imported oil and vehicles. And arguably we can’t because we find it necessary to import second hand vehicles. And now we have the ultimate indignity where I see reported this week that some are having to import second hand Maserati’s – truly awful and degrading!

Surely Auckland needs to re-think its options for transport solutions? I wonder if there might be a better way? Why? Putting low cost housing at the ends of Auckland is helpful for no one apart from the developers of single storey housing. And unfortunately this is the bulk of builders in this country because few have the scale to construct anything else. As many have said previously, urban sprawl creates a significant transport cost for those who invariably have to travel to find work and to source established amenities. I puts a cost on the rest of society who subsidise the building and running costs of their public transport (and because it is so distant it is more expensive) and the provision of new public amenities.

I have been lucky to recently meet an inhabitant of Vienna. That city has a population of 1.7 million people and has 5 metro lines. Apparently public transport and biking to this transport is accepted as the way that many move around. I encourage people to have a look on google and lo and behold there is a CRL. Yes unbelievable -they have something that some can’t comprehend might be remotely useful for Auckland!

What if we adopted the premise that any new development was structured around an efficient public transport network? That the roading system and lanes are designed to facilitate this function.

What if we said that instead of widening the southern and northern motorways we build public transport that obviated the need for this? Yes that means rail. I struggle with the argument that we do need to build a road now, but public transport will only be justified x years down the track. What if people were just as happy with a high spec public transit system that delivered them to their destination more quickly than their own car, and achieved it more cheaply? Wouldn’t this be worth at least investigating instead of the current mindset that says, we are going to build a road no matter what it costs. And that negative correlation mentioned by Matt for economic return seems absolutely frightening1

What frustrates me is the total lack of questioning of this very issue by the mainstream media or by the Labour opposition. National is always so ready to ridicule the plans of opposition parties as being unaffordable, yet how much scrutiny does the affordability or cost-effectiveness of the Roads of Significance to National receive.
If only Phil Goff, when asked by John Key in 2011 to “Show me the money”, had simply responded, “Easy, John. We will cancel your Roads of National Extravagance and that would free up plenty of money”. This could have kicked off a debate way back then, which needed to be had and still does.

NZ, Ireland, wherever.. engineers have to raise their critical thinking, especially in terms of the ethical basis for what they do.

Sure, roads can be good. For everyone, never mind engineers. Flatter, straighter, safer cross country, what’s not to like?!

But you’ve missed the point, John.

For an engineer to assert baldly an axiomatic starting position like that of Chapter 1, section 1 of Highway Engineering, 2 ed. is at best misguided and simplistic and at worst disingenuous.. i.e. the very opposite of the root of the word “engineering”.

In a published book, of all things, our engineer needs to do better. His profession requires no less of him. So do the rest of us.

Likewise all engineers involved at any stage in the design / development / build / operation of any infrastructure, roading or otherwise. In the context of the post, it’s suggested that extensive roading projects need to come under especialy scrutiny.

I’m suggesting that rather than construct a technical challenge to the programme (RoNS etc) an ethical one may help engineers to ask themselves more questions.

I can accept your point TBW engineers do need to think critically especially when the project they are employed on can have impacts beyond their own client and for many years to come. And probably that author could have said ‘some roads’ or been more qualified in his opening. Or even more correctly pointed out that infrastructure projects don’t really create growth- savings and technology do that. But infrastructure projects roads, rail and telecoms etc can relieve bottlenecks to growth. (I think Adam Smith included canals and roads). As for stimulating the economy by building big concrete dicks as suggested above that falls within Keynesian economics. JM Keynes suggested burying money in a field and selling the right to dig it up. I am not sure how serious he was. These days few economists are true Keynesians. My real problem with the original post was simply that it was spurious like the classic sun spots correlate with economic cycles rubbish.

Sorry for flogging a dead horse by resurrecting a bad post but it occurred to me that this model of roads vs GDP change probably contains an element of mutual causality ie states with high GDP can afford major infrastructure projects and infrastructure such as metro projects or strong urban renewal projects would show up in GDP stats. The upshot is mutual causality means there is endogeneity in the data so the ordinary least squares regression he has used fails and can’t be used and the answer is simply wrong.